Getting the Attention of VCs: The Endorsement of Clean Energy Startups through Government Grants

Abstract

The clean energy sector is distinct in that the initial capital requirement for technology development typically is comparable to the capital needed for other technology sectors yet commercializing startups tends to be significantly costlier. The lack of funding between the development of these technologies and their large scale commercialization – known as the Valley of Death – often derails promising startups in this sector. If these companies are to succeed government research grants may play a critical role; however, the impact of these grants based on past research is not clear. Does receiving a government research grant raise the status of the companies that receive them? We hypothesize that startups in the clean energy sector gain reputational value from the endorsement of government agencies. We examine research-intensive clean energy startups between 2005 and 2011 and find that startups that received grants were more likely to acquire venture capital (VC) funding than similar startups that had not received grants. The startups most likely to benefit from the endorsement were those that lacked a history of prior patenting or VC funding. We argue that the underlying mechanism for our findings was that the information revealed from grant contests allowed the VCs to better assess the startups’ technical competence and commercial prospects. Our findings advance our understanding of the role that government endorsement plays in technological innovation. By raising start-up status, it enhances the chances that startups will receive additional private sector funding.